• "Friendly fraud" or "first-party fraud" happens when a customer disputes a legitimate charge they made on their credit card, debit card, or another payment method.
• Some people do this by accident, largely due to confusion over how the merchant's name is displayed on their bill.
• It's become easier to dispute charges in recent years with enhancements to mobile banking service, but experts recommend communicating the issue with the merchant before disputing a charge.

When a product you ordered online arrives and it's not up to par, you might contact the merchant to address the problem.

However, what happens if you skip that step and just dispute the credit card transaction? 

More consumers are doing just that — some in bad faith to get their money back from the card issuer, even if there's no problem with the purchase. It's just one example of so-called "friendly" or "first-party" fraud that's catching the attention of security and credit card companies. 

Friendly fraud, when a customer disputes a legitimate charge they made on their credit card, debit card, or another payment method, is responsible for $100 billion of loss for businesses each year, according to identity verification platform Socure.

Additionally, 35% of Americans have committed first-party fraud, and 40% know someone who has, according to the Socure October survey of 1,000 adults.

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Here's part of the problem: Disputing charges has become easier for consumers in recent years, experts say, largely thanks to efforts to enhance mobile banking service in response to canceled travel and other pandemic repercussions.

"There are legitimate disputes, and the chargeback process was built to recognize and provide some sort of relief for those legitimate disputes," said Rodrigo Figueroa, chief operating officer of Chargeback Gurus, a company that helps businesses recover revenue.

"Now we see this massive level of abuse," he said.

Friendly fraud is a broad term

Credit card experts say identifying friendly fraud can be difficult. 

"There are a lot of stats around the rise of it, but it seems like it's almost becoming this catch-all for anything we just don't understand," said Robert Painter, vice president of partnerships at fraud protection platform Kount, an Equifax company. "The word fraud is sometimes even used a little loosely."

Sometimes, there isn't an intent to defraud, experts admit.

For example, a consumer who doesn't recognize the merchant name used to identify a purchase on their credit card bill might dispute the charge as fraudulent. Under the Fair Credit Billing Act, this is a legitimate dispute, said Chi Chi Wu, a senior attorney at the National Consumer Law Center.

"The merchant places a charge on a credit card account and doesn't use the commonly known name and the consumer disputes that. That's a legitimate dispute under the law," said Wu. "They have a right to clarification."

Still, this scenario can be labeled as friendly fraud.

According to the Socure report, 29% of those who said they engaged in first-party fraud said it was an accident. Others said they were experiencing economic hardship (34%) or they knew someone else who had gotten away with this maneuver and gave it a try (19%). 

Merchants take the biggest toll

Determining the intent of the consumer can be the toughest issue to solve for fraud experts, said Socure CEO and founder Johnny Ayers.

The company launched a consortium of banks and fintech companies in 2023 to address this, identifying data that doesn't show up in typical credit reports in an attempt to recognize bad actors. 

"We look at the number of accounts, number of disputes, number of overturned disputes, number of closed accounts. You start to stack all of these and you start to see intent," Ayers said. "You start to see the behavior of this individual has a very large standard deviation from a normal person."

Whether legitimate or not, experts say merchants can feel the pain from a high volume of chargebacks, when a credit card provider demands a merchant to make good on a transaction disputed by the consumer as fraudulent.

Excessive chargebacks could also affect a merchant's ability to process cards or a credit card company could levy fines or fees against the merchant, according to Domenic Cirone, vice president of acquirer solutions at Equifax, which acquired Kount in 2021. 

The Merchant Risk Council, which consists of 600 e-commerce companies, reported in April that 94% of its members have experienced first-party fraud in the past year.

Looking at Socure's research, $89 billion of the $100 billion attributed to this type of fraud is lost by merchants. The remainder comes from credit card fraud loss ($18 billion) and the dispute resolution from the top 15 U.S. banks. ($3 billion).

'Most folks are honest'

Before consumers make a legitimate dispute, credit card experts and advocates recommend attempting to resolve the issue with the merchant first.

Part of why filing a dispute is so easy is because a credit card issuer will often choose to accept a dispute to preserve its reputation, according to Wu.

"One thing credit card issuers really [have to] think about before they start fighting with merchants all the time is, 'Is this going to affect the ability to retain good customers,'" she said. "I definitely hear from consumers [saying] 'X issuer is good on disputes. They stand up for me." 

Meanwhile, fraud professionals point to social media for the jump in friendly fraud.

A TikTok search of "disputing credit card charge" results in hundreds of videos of finance influencers sharing tips for disputing charges, and even people admitting to disputing legitimate charges to get their money back.

"They just teach you how to go steal money," Ayers said. "All they're doing is giving how-to guides of how to work around the rules, basically to systematically steal money from these organizations in a way that made it look like it was some type of duress or distress."

But a lot of disputes can be attributed to simple misunderstandings between the consumer, merchant and card issuer, Cirone said.

"Every time a transaction is disputed as fraud, it's a line item that goes through the Visa, MasterCard, Amex, Discover system. That overall statistic that I'm talking about is not driven by social media," Cirone said. "Most folks are honest. Consumers, cardholders are honest folks and I think there's a break in communication."